Ousting the CEO was all the rage in 2004

CEO dismissals and other forced departures reached record levels last year, according to the fourth annual survey of CEO turnover.

The study of the world’s 2,500 largest publicly traded corporations by strategy and technology consulting firm Booz Allen Hamilton also found that boards of directors in Europe are the quickest to remove underperforming CEOs.

The study examines the links between CEO tenure and corporate performance, comparing CEO turnover in major regions and in specific industry sectors. It finds that:

Globally, performance-related successions increased 44% from 2003, and represented 31.4% of all CEO departures in 2004

Overall, 14.2% of chief executives left office in 2004, compared to 9.8% in 2003

The rate of CEO dismissals has increased by 300% from 1995 to 2004

In 2004, 42% of CEO successions at European companies were related to performance, compared with 31% in the US

Globally, underperforming CEOs were removed after an average of 4.5 years in 2004. In Europe, CEOs removed for poor performance were in office for just 2.5 years

Regionally, the succession rate was highest in the Asia/Pacific region (excluding Japan), where 17.5% of the largest companies changed their CEO – a 230% increase over 2003.

The study’s results reveal a growing haste to remove chief executives who fail to deliver strong results in the first few years of their tenure.

“Business has entered the era of the short-term chief executive,” said Alan Gemes, UK-based vice president of Booz Allen Hamilton. “CEOs need an agenda that puts the company on the right strategic path, but that also produces short-term wins that don’t hurt the company in the long run.”

Key study findings

Europe and Asia (excluding Japan) have become the most demanding environments for CEOs. These regions have the highest overall turnover, the most firings, the shortest tenures, and the most rapidly increasing rates of turnover. Europe’s turnover rate of 16.8% is 425% higher than 1995, the first year of Booz Allen tracked CEO successions. The Asia turnover rate of 17.5% (excluding Japan) is 256% higher than 1995 levels. The CEO succession rate in Japan was 15.5%, and 11.7% in North America.

Underperformance is the primary reason CEOs get fired, rather than ethics, illegality or power struggles. Forced turnovers are strongly correlated with poor shareholder returns

Successful companies are more likely to fire a new CEO. Contrary to conventional wisdom, companies that performed well during the two years prior to their CEO’s appointment have been one-third more likely to force that new CEO from office. Companies that struggled before their new CEOs came in were more likely to keep them longer.

New chief executives hired from the outside inherit companies in much worse shape than those inherited by insiders. For the CEO ‘class of 2004’, outsider CEOs joined companies whose shareholder returns averaged 5.2 percentage points lower during the preceding year than companies that promoted insiders.

The CEO ‘class of 2004’ was the youngest seen since the study’s inception. Globally, the average age of departure was 57.8. European CEOs were the youngest, with average ages of 54.1.

A former CEO who stays as chairman creates a drag on performance. Companies in which a retired chief executive stayed on as chairman (46% of companies) underperformed other firms by a regionally-adjusted 2.8 percentage points annually.